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Barings bullish on global outlook for commodities

Thursday 18th March 2010
By Mike Jones

In light of China’s continued focus on infrastructure expansion, Jonathan Blake, manager of Baring Asset Management’s Baring Global Resources Fund has increased the fund’s weightings in base metals from 43% at the end of December to 48% by the end of February, with a particular focus on bulk commodities such as iron ore and copper.

With infrastructure spending in China rising by 42% in 2009 after increasing by 21% in 2008, demand for a select group of hard commodities, continues to grow.

Blake said: "Much of this infrastructure investment is to meet the demands of urbanisation, the scale and speed of which is staggering. It has been estimated that an average of 17 million people will be added to China’s urban population each year between 2000 and 2025."

He also plans to increase the Fund’s allocation to precious metals – predominately gold and platinum – over the next three to six months reflecting both an expected improvement in the fundamentals for these markets as well as providing protection against any rise in inflation over the medium-term.

Blake said: "Quantitative easing has, to some extent, undermined confidence in currencies, such as the US dollar and has heightened expectations of a rise in inflation at some point in the future. This boosts gold’s appeal as an alternative store of value. Looking at platinum, we expect a recovery in the jewellery sector in China and strong emerging market car sales to offset subdued demand from developed markets."

Despite a relatively muted short-term outlook for oil demand and the need in the medium-term for a solid recovery in OECD countries, Barings believes that the long-term fundamentals support prices above USD 80 a barrel.

Blake said: "We continue to favour stocks in the shorter term that can outperform in a benign oil price environment and for this reason are targeting companies involved in upstream activities such as exploration or are able to materially increase either current production and/or reserves."

While Barings is positive about the medium-term outlook for the soft commodities sector, it sees particularly attractive opportunities in the fertiliser market. The reduced use of fertilisers in 2009 is leading to a rebound this year as farmers have effectively mined the soil of nutrients and these will need to be replaced. Furthermore, fertiliser volumes are expected to receive an additional boost through the restocking of the supply chain.

Blake said: "We believe the long-term case for resource equities is attractive, driven by sustainable global demand led by China, and instability of supply. In the short-term there will be plenty of volatility but this presents some tremendous opportunities for skilful stock picking."

Over the past 12 months the Fund has posted a return of 55.7% versus a 57.5% return from the comparative index (60% MSCI World Metals & Mining Index/ 40% MSCI World Energy Index).

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